Law on Rice

I just came across In re Bakersfield Westar, Inc., 22 B.R. 227 (9th Cir. B.A.P. 1998), a case holding that a conversion from an “S corp” to a “C corp” could be a fraudulent transfer of property under 11 USC 548(a).

Wow!

If the reasoning of the case is followed earnestly, can a debtor in possession or bankruptcy trustee now unwind any number of administrative maneuvers taken by a corporation?

I have a new idea that I’m sketching out here without too much thought: what if we had specialized financial institution courts? They would be highly trained courts with broad equitable powers.

These specialized courts would spur innovation and secure America’s lead as a financial powerhouse. You see this with the Delaware Courts of Chancery.

They would have jurisdiction over large financial institutions that pose a “systemic risk.” Congress would give them jurisdiction, and control their freedom of movement.

People would complain that courts move too slowly to solve high speed financial disasters, but I would solve that with a powerful stay that looks like a localized bank holiday. It would be not unlike the automatic stay imposed by bankruptcy courts under 11 U.S.C. 362(a).

Sure, they would be the playthings of lawyers, but at least there would be due process protection.

I think it’s a great idea conceptually. There are, of course, a million and a half ideas to work out.

Some bankruptcy issues can end up in state court, so I just learned. It turns out that a creditor can sue a debtor for, say, not paying student loans. Even if the debtor asserted that the loans were discharged in the debtor’s prior bankruptcy via 11 U.S.C. 523(a)(8), the creditor can sue in state court.

Prior to talking to my professor this morning, I would have assumed anytime a party raised the issue, the case would have to go back to the bankruptcy court. That’s what happened in Espinosa, but Espinosa had to reopen the bankruptcy case to do it.

I found one such case, Southwest Student Services Corp. v. Ma, 5 Misc.3d 884, 786 N.Y.S.2d 727 (N.Y.City Civ.Ct. 2004). In Ma, the debtor had a credit card called a “CollegeCard” issued by an Arizona lender. The court ruled that the credit card was an educational loan because it was “issued as a medium for an educational loan, as evidenced in several places on the application Defendant signed, and Plaintiff is a nonprofit organization authorized to issue such educational loans.” Id. at 885-86.  Since the debtor didn’t seek an “undue hardship” determination from the bankruptcy court, Id. at 884, the creditor could sue here.

I wonder if Mr. Ma’s bankruptcy lawyer just assumed that because it was a credit card, it was discharged. I also wonder if Mr. Ma were represented by a bankruptcy attorney in this case (he was pro se) whether that lawyer would have made more of the issue.

My professor cautioned that this can be risky for the creditor because if they lose, then they’ll be liable for violating the automatic stay. That might explain why I only found 35 written opinions anywhere in the U.S. on the matter.

The New York Times has an interesting article about an issue that I’ve been hearing about from bankruptcy judges for a little while: mortgage lenders are having trouble proving that they have standing to assert their claims because of their securitization agreements.

The article has a few technical inaccuracies, but it’s worth reading here.

Ann Minch (a/k/a Rockerchic4God) is trying to create some social media mischief on YouTube by creating a debtor’s revolt. Watch the video here, and read the HuffPo article here. A debtor’s revolt sure would make for some great blog fodder if it gets off the ground.

I don’t normally think of these issues as creating that kind of anger, but then, why shouldn’t it? If the debtors are feeling powerless, why not turn to the source of power they have do have and start a debtor’s revolt?

Update: looks like I’m a little behind the curve. This stuff was first reported about a month ago, and a few years ago Charles Mudede at Seattle’s Stranger was advocating a debtor’s revolt too. I have so much to learn.

We just happened to be driving Eisenhower near the Genessee dog park. Little did we know we were stumbling upon Dog-o-Ween!

Had we known, we would have put a sombrero on General Eisenhower.

Here are just a few of the pictures I got on the iPhone:

If you recall, last weekend I was feverishly working on the first draft of my independent study paper on Espinosa. That feverish work got the bones on the paper. Now, I can leisurely work through some of the more interesting issues raised by the case.

First among these leisurely reads is Prof. Pardo’s amicus brief (which I read as the Angels gave up their last gasp tonight). Prof. Pardo is a professor at the law school, and he submitted an amicus brief in Espinosa.

His argument is complex but interesting–especially for someone who likes procedure, like me.

Because section 1330 compelled the creditor, United Student Aid Funds, to object to the plan’s confirmation within 180 days, the bankruptcy court lost subject matter jurisdiction when the creditor objected to the plan ten years later. Prof. Pardo points to a recent non-bankruptcy case, Bowles v. Russell, 127 S. Ct. 2360 (2007), authored by Justice Thomas. Here is the summary of Bowles from Westlaw:

Having failed to file a timely notice of appeal from the Federal District Court’s denial of habeas relief, petitioner Bowles moved to reopen the filing period pursuant to Federal Rule of Appellate Procedure 4(a)(6), which allows a district court to grant a 14-day extension under certain conditions, see 28 U.S.C. § 2107(c). The District Court granted Bowles’ motion but inexplicably gave him 17 days to file his notice of appeal. He filed within the 17 days allowed by the District Court, but after the 14-day period allowed by Rule 4(a)(6) and § 2107(c). The Sixth Circuit held that the notice was untimely and that it therefore lacked jurisdiction to hear the case under this Court’s precedent. Held: Bowles’ untimely notice of appeal-though filed in reliance upon the District Court’s order-deprived the Sixth Circuit of jurisdiction.

So, on that summary alone, I think Prof. Pardo seems to have a compelling argument that Espinosa is analgous to Bowles. Or does he?

Posts such as what you’re about to read really undercut my popularity in the blogosphere, I know. But I can’t resist. I’m reading a recent Ninth Circuit Bankruptcy Appellate Panel Case, In re Smith. It’s pretty significant, but I’ll get to that later.

The thing I found most interesting at this point was the difference between sections 1328(a) and 1328(b). Under 1328(a), the court “shall” confirm a plan that complies with the subsections of 1328(a)(1)-(9). The most important of those appear to be that the plan is in “good faith.”

It seems like the debtor is only required to commit all of the debtor’s projected disposable income, however, if the trustee (or an unsecured creditor) objects to the plan’s confirmation as provided for by 1328(b)(1)(B).

So, does this mean that a plan proposed “in good faith” has to commit all the debtor’s disposable income? Or does it simply mean that the debtor is required to make the best effort possible, even if not all disposable income is committed?

I have an ancillary question too. What is it about trustee economics that would motivate them to object? If, for example, the debtor has very little disposable income, does it economically make sense for the trustee to object when the trustee will not be able to recover much in fees? Or am I missing something important here?

As you know by now, Mr. Feinberg wants to cut a few compensation packages for a few lucky finance executives.

While I’m generally concerned about America giving regulators a say on executive compensation, I think my professor is right about a key feature of the move–America wants its pound of flesh from the bankers. America wants retribution.

So why not charge them criminally? I’m not saying that we should. I’m just saying that regulators should generally hand out regulation, not retribution. That’s what our criminal courts are for. At least the executives would have the benefit of a jury. If we want to exact revenge, we should seek it in the right tribunal.

I found a 26 page memorandum decision by the Montana bankruptcy judge in In re BLX Corp., No. 09-61893-11. Judge Kirscher had to decide yet another issue in the ongoing Blixseth/Yellowstone Mountain Club bankruptcy. The issues are complex, but getting to the opinion is simple: click here.

There were two new chapter 11 bankruptcy cases in the District of Arizona, both individuals. In the Central District of California, there were five new chapter 11 filings including one called Speed Twin Sport Fishing and one called Sasy Holdings, LLC. The rest were individuals. There was only one in California’s Northern District, one in Washington’s Western District, and there were no chapter 11s in Nevada today.